patrick.net

@Randy H,

I read your notes on "Wonderin'" after posting mine. I really liked your little postscipt to his nearly identical post on your charts 'n graphs thread. Methinks I shall unleash a can o' Troll B-Gone on this fuckknob.

X, is that you?

No, it's just little ole' me. I guess that DID sound very Surfer-esque, didn't it? Why, I'm flattered by the comparison. 8-)

I don't know about Bay Area becoming like NYC. But BA is an expensive place to live, and I don't see that changing. I like this area, and it certainly deserves a premium. The question is how much. Answer whatever people are willing to pay.

That will not stop the BA RE market from going up and down, up and down forever. Even in the most bullish scenario, I do not see any appreciation - even nominal - happening in BA for a long time to come - like 10 years. there is no hurry to buy. In the most bearish scenario, I can easily see far away places like Tracy dropping 50%, and core areas like Cupertino dropping 25%.

I will change my view if I see wage inflation.

Prop 13 helps keep the rents low.
I'm renting a smal TH that my landlord bought a zillion years ago and pays some ridiculously low tax on it. My rent is pretty low and I have a nice feeling that I'm getting my share of Prop 13 protection. For me it's another reason to rent.

John Haverty,

Maybe I did not express myself clearly. I do not have any debt. I abhor it. I actually dislike debt more than I should. As Randy has pointed out numerous times, debt can be used to advantage in an inflationary scenario.

I was only pointing out the perils of servicing a huge debt. It comes at the cost of your retirement savings etc. People treat their home as an investment vehicle to their retirement, college and what not. That is akin to putting all your eggs in one basket.

JH,

You can always engineer your own amortization schedule if you have a fixed-rate simple interest mortgage with no prepayment penalty.

You just pay an extra amount to every payment (that will apply directly to principal) which preserves your amortization schedule, by reducing your number of total required payments.

You can use Excel or a financial calculator to figure the amount you should pay (as opposed to what your payment stub says).

If you want to prove this to yourself, go into Excel and blow all your payments out in rows for Loan A. Then copy a Loan B next to it, and change the length from say 30 to 29 years, but keep the interest rate the same. You'll see the INT and PRIN amounts in Loan B work out to an extension of Loan A, only ending in year 29, at which point you're paid off.

Or, you can just tell your bank that this is what you want to do and they very well may give you a 29 year loan. I've done this once (got a 22 year loan), but that was a while ago.

By the same mechanism, you can get a 30-year loan but turn it into a 15 year loan with a free payment option of 15 extra years of "buffer" at no cost (and ignoring the interest rate difference, of course, which is why they give you a lower rate on a 15 year, to keep you from arbitraging them in this way, but often the rate difference still aren't enough to compensate for the value of this free "option").

In fact, all US-style mortgages that are fixed, simple, have a built in free option because you can pre-pay.

You can always engineer your own amortization schedule if you have a fixed-rate simple interest mortgage with no prepayment penalty.

I may stir up some fur here but I think interest only loan with a reasonable rate-lock period is a pretty good instrument to engineer such custom amortization table. One can even "amortize" into a liquid account for more flexibility or potentially higher return.

A lower monthly obligation can actually reduce risks in the hands of a responsible homedebtor.

NOT INVESTMENT ADVICE

JH,

Inflation is not 1:1 linked to nominal rates in the US. In fact, nominal rates very often diverge from real rates given inflation in the US because of a bunch of stuff no one wants to read about.

It is not at all common to find opportunities to "personally arbitrage" low rate, fixed loans at greater than the risk-free rate of return if one is properly financially positioned. Rich people do this all the time, even Mr. Buffet.

Everyday people do it all the time too, with low rate student loans. Why pay off a 2.5% loan early when you can get 4.0% on a long CD? Sure, if rates fall to 1.0% on CDs, you should think about paying that loan down, but normally, you should not.

As to all the core inflation stuff, I understand your point about "not wishing for inflation". I certainly don't. I'd give up all my opportunities to exploit debt for the promise of no "extra" inflation in the future. But the fact is inflation is an EXTERNAL force on all of us, while debt leverage is an INTERNAL decision. Since I cannot control inflation, I'll pay $4.00, $5.00, $6.00 for gas regardless of what I do with debt. If the Fed forces nominal rates down, then I am damned well going to take advantage of that where I can, because that's all I can control.

I was thinking I go, switch banks and re-fi and not get the amortization reset.

BofA did this for me once some years ago. I got a Wells Fargo refi offer and went to BofA and got them to match the rate but give me a 22 year loan.

It doesn't hurt to ask.

Peter P,

I may stir up some fur here but I think interest only loan with a reasonable rate-lock period is a pretty good instrument to engineer such custom amortization table.

You are technically correct; but the only guy I know who did this and I would personally qualify as "knowing what he's doing" was a bond trader who works at Pimco.

For mortal men, it is not advisable. I think you have to match durations, which gets into all kinds of bond math and forward rate kind of junk. But, if you're up to the task, you can gain advantage from IO loans.

Again, lots of rich folks' have wealth managers to engineer such instruments for them, even though they have the cash to just buy stuff outright. Why buy stuff with your money when the bank will pay you to buy it with theirs? (The answer to that rhetorical is sadly because the Fed is paying the bank to pay the rich guys to pay the wealth managers, and who pays the Fed? Mr. Everyday does with inflation.)

But a Corolla is a bit light and small...

Fuel efficiency is overrated. Gas is so cheap in America that it does not matter anyway. We should be more concerned about safety (among big SUVs).

Maybe I should stop looking and just be happy with my jeep.

How about the Toyota FJ Crusier? It looks very nice in blue.

I like drum brakes, they last longer.

Huh? I just need the safest possible equipment.

The article by A. Gary Shilling in Forbes.com on 666 entitled, Implosion.

http://www.forbes.com/forbes/2006/0619/168_print.html

You want the truth? You can't handle the truth!

The price correction in real estate will make your head spin.

I need better mpg and a little more space….Basically a small wagon will do just fine.

How about a subaru?

Happy 06/06/06. Good night!

06/06/06? keep a close eye on george bush.... especially see if his eyes start glowing or changing to black or similar... ditto for wolfy, cheney, ricey, rummy, rovey, mclellan, ... one of them's gotta be the anti-christ...

does anyone know anything about hybrid-powered minibus offerings in the states, most likely from toyota or similar?

well, i got through 6/6/6 16 hours ahead of you, and nothing to report -- just a little rain over the city, and the reservoir needs filling anyhow...

Randy H,

I tend to side w/Peter P on his application of an IO Loan. Not that I necessarily advocate their use by less sophisticated investors but used as originally designed they can be quite effective. I've run "hypos" with even modest returns and the longer your rate lock the better the scenario. Well sadly the mortgage brokers contorted the whole application by giving the IO "broader appeal" and it's now a total mess. I'm sorry I missed much of that discussion but it was way past me bedtime. There are credible firms out there that for no out of pocket expense to the client apply some pretty nifty software to your overall debt picture and are typically able to knock 1/2 to 2/3rds off of the time you will be in debt. They simply take stock of your debt scenario (college loans, auto, cc, home etc.) create a reserve account to pay some of your bills early reducing your int. expense. Typically the "program" starts with the smaller revolving accounts, pays them down then off, moves to the auto loans with the additional capital from the now paid off charge cards. And so on and so on until your house is paid off in 12-15 years (in many cases less) and you are now free to fund your retirement and John Haverty will see 59 1/2 and many more debt free birthdays. You could probably do this for yourself but the proprietary software just makes it so much easier. It's not rocket science guys.

Newbietobayarea,
It's funny that you mention how much you really, really want a house here in Cal, moving from TX, when in fact about half the people I know want to LEAVE Ca for TX! Perhaps if enough of us leave cali, you'll get your wish sooner than later.

The Federal government has assumed obligatons it cannot meet in the form of wealth redistribution schemes called Soc Sec and Medi-whatever along with AFDC, HUD, Dept Ed, on and on.

hmm, that's a shame, the govt here is in the black, but has universal free healthcare, nearly free universal university education, and unemployment and disability benefits with no cut-off period -- on similar tax levels to the US. where's all your tax dollars going? oh, maybe 'defence'...military hardware is expensive...

TX is "ok" - i love austin, but thats about it. houston and dallas are hot and miserable for half the year with not much to do (outdoors wise). but you can have a nice house and reasonable life there.

in BA, the job market is more diversified, ppl more cultured (for the most part) and its beautiful. i also liked seattle but the rain is enough for us not to move there, but this year's rain in the BA seemed very Seattle-ish. who knows global warming?

well some of the properties i have been looking at have been priced about 8% off of its price last year. The one thing I find interesting, in an economy of rising interest rates, most asset classes would file (just like stock market did yesterday). However debt laden, fixed interest homeowners are hedged against interest rate increases (even if its for 4 yrs of 5 yrs). Lets assume that the last two years were the most frothy, even the debtors of two years ago still have a few years before their interest rate resets. this to me seems that it will keep nominal prices flat, while raising real prices for those of us that don't have hundreds of thousands of cash for a downpayment. For myself and wife, recent college grads, it will take years and years to save enough money for a downpayment to hedge fast rising interest rates, pricing us out of the market even if nominal rates don't. Perhaps the real way to do it is to have the homeseller carry-back the 20% downpayment at a sub-market interest rate.

in either case, the home market may be slowing but it will take a while to change. Even a 2 - 3% appreciation is still hard to match by personally saving - for most ppl, its their entire annual savings. I am not bullish on a bear market. I am not bullish on a bull market either. I just don't see homeowners forced to lower homeprices for several years - and during that time 1) anything can happen and 2) ppl like me will continue to be priced out, which always begs to ask the question - just WHO is buying houses anyone if ppl with incomes close to 200k can barely afford to buy here

RC,

Forgot to mention that I have been saving for several years. What I meant to say that without totally ruining quality of life, its hard to save when your salary is X and the house value is 4x (or even 5 or 6x). Appreciation/inflation to the 4x is such are larger number than what you can save, that it seems that you cannot catch up.

I am not one who believes ppl should purchase outside their means - I think a home 4x income is reasonable. I also think hedging interest with downpayment makes the most sense, but as explained above it can be an elusive target.

on the brightside, i am renting a $900k property for $2300 - let the owner's pay me to live in their place, not a bad deal

newbietobayarea,
Indeed, the area is "nice" in many ways. I'm a Tennesee native and have lived here for 7 years. I grew up around good-ole- boys who would stop to help you change a tire or anything else for that matter, even if you didn't know them. The food was somewhat over-fried and fatty, but it sure was good after mowing in 90 degree heat, and jumping into a lake sure was great too. We had a huge yard( 13 acres) with a big field me and the neighbors played football in.
Moving out here, I found the change refreshing and new. The job market is indeed good... but everyone else ALSO has a similiar job, and the Pay hasn't budged in years. The weather is indeed terrific.. but 2 years in a row we surpassed my home state in rainfall. I almost went ape this year and hope we aren't in for a long period of these kinds if winters.
I guess what I'm saying is that of the many people I've met who've been here as long as I have and came from somewhere else, we've sort of made some conclusions. Yes- the area is nice, but at what cost do you have to pay to be amoungst those who can afford to stay? How much are YOU willing to spend? 600k? 700k? 800k? over a million? and- how about schools? Are you willing to send Jr to one of the worst schools systems in the country or fork out another 50-60k for private schools? What about taxes.. Do you want to spend 30% of your paycheck in taxes that show no proof of actually doing anything?
The alternative is weather that can be hot, cold, or rainy on a more regular basis, more strip malls, and perhaps people that like to drink Budweiser and watch monster truck shows. So at least for me it has come down to this: A neverending stream of crushing expense in order to stay in an area that has good sushi, concentrated sunshine, and coastal towns with shishi little coffee shops, or... Guys that like to watch Monster trucks, drive to Wal-mart for Motor oil, and occasional weather patterns that prevent picnics.
The later of the 2 for some reason is sounding better and better all the time, but maybe I've been here too long and away from there long enough to forget the "pain" of living there.

George,

At about 5:00am Pacific the S+P 500 Futures were up about 1.20 (and you just knew it couldn't last). I'd heard that DL is basically pleading with BB not to raise rates any further! Something about a few markets being "interest rate sensitive and vulnerable". A few markets? Well, whatever. I have been short the S+P but may have to close out shorting the dollar if this "insane talk" of another 1/4 point hike persists! The nerve!

WW2,

Yep its all about priorities and perspectives. The grass is always greener -- at least places like London are far more expensive than BA. To be fair, the BA should be compared to other same class cities like NYC, Paris, Tokyo, London, Singapore, etc.

Interestingly, read an article about how RE in India & China is taking off as well. India is having some of its lowest interest rates in a long time... and with IBM planning on investing another $6B over there AND them holding their investor/analyst conference in India (the first time it has ever been outside the US for IBM), maybe we should not invest here - keep renting here and invest in RE over there. It seems all the news is about China and India these days. And if companies liKe IBM are even moving their analyst conferences there, what portent is that for the US?

Perhaps we should get our head out of the sand and acknowledge the rest of the world... Pretty soon we may be all saying "Yes, Mr. Patel" or "Yes, Mrs. Chang"... :-) not that it bothers me, ppl in Asia have a right to be successful. If they do it through education and beat us fairly, they deserve the prize.

DL on his knees begging BB not to raise rates any more. Which particular markets are "interest rate sensitive". Do you mean like the 78% of "homedebtors" in CA that went ARM last year? Or the top 25 RE markets or the country at large? Probably just meant San Diego.

newbietobayarea,
The whole asian rennaisance is something that many in the BA are only too painfully aware of. Reason being is that the only reason people get paid those big wages here is because of the tech industry. I'm sure that there are some nervous folks out there who fully realize that the fact that China has over 700,000 engineers graduating every year means those high wages in california will eventually become an achile's heel. I can't think of a more vulnurable position to be in that the BA is now getting into, which is a job market that costs more that 60% more than the next closest state, and 100 times more than anywhere in Asia. A company that tries to compete against a Chinese R & D firm in 5 years will lose every time, and the first priority will be getting rid of the jobs. Adios high paying jobs!
That's one more reason I'm eyeing other regions of the country. While not neccesarily true now, I am putting my bets on the cheaper parts of the country for future development and good job markets. There's already tons of outside investment coming into these regions, they don't have sticky development, environmental laws, or high business tax. The writing to me at least seems on the wall, and if timed right, the prospect is a nice area with good schools, a growing job market, and affordable housing. It's a gamble and one that could go sour. But I don't see how buying an overpriced house is better, especially when what I think will happen to the BA economy will happen in the next decade.

WW2,

Good points. Instead of off-shoring, I am all for cloneshoring... make an army of clones and have them do all the work!

Seriously though, the BA and the rest of the country have one advantage over the world - that is the US attracts the best and brightest. But ridiculous immigration laws (thank you GW) are making it more attractive for Asians that want to emmigrate to want to go to Australia, UK or Canada instead.

I do think wthere will be some labor moving to other parts of the countries - but having the intellectual assets in place will still make Cali competitive, but more specialized. I say keep immigration policy open and offer tax benefits to companies to keep R&D here. Use the same weapons others are. And most importantly stop graduating English and Liberal Arts majors by the gazillions, focus on what the wolrd has said is important - math & science. That is a job for the parents... one I think the Indian and Chinese parents seem to understand much better than anyone else. In the long run, its the nerds that rule...

DinOR,

We are in agreement with IO loans, not disagreement. My point was that mere mortals probably should not attempt to do-it-yourself what the software you are talking about will do unerringly. It is "rocket science" for most people if you try to do it yourself.

But I am a big believer in financial engineering, and I agree IO loans have been perverted and given an unfairly bad name because of the bubble and unscrupulous lenders.

RC,

27% of CPI called Owners Equivalent Rent which has said that for the past half decade the price of housing has remained flat.

Not necessarily disagreeing with you but just wondering, what NIA methodology would you propose to be more accurate? After all, OER is a NIA mechanism, and one which is consistent across 18 of the 20 largest world economies, only excluding Japan and UK. And, the UK does a direct home-price to debt (imputed equity) measure which they add to aggregate savings, and which is widely believed to be far less accurate of a metric than OER (because of all the nastiness involved in matching debt terms).

Robert Cote'

My sentiments exactly. Had this thing stopped at a point just shy of completely and utterly insane we could have made do with a minor correction (10-20%) and gone on about our lives. That time has come and gone and now it's going to be painful. Lerah is clearly on the defensive now and he very obviously flailing for someone to blame. Why not Ben? Again though any assertion that int. rates and int. rates alone were the catalyst for the bubble strike me as odd. While many other factors were at play to create the bubble we only need one to burst it.

newbietobayarea,
The intellectual argument is a fairly classic one that is an effort to segregate California from the rest of the country due to the perception that it is somehow the chosen state where the highly intelligent, creative, and gifted people migrate to. I've been studying the shifting changes across the country, and all you have to do is look at some basis facts.
Clear Channel, CNN, Sprint, Alltel, HSN, HGTV,CMT, Food Network, DIY, Cingular, TX Intruments, Datasouth, NASCAR, and the zillion other non-Californian companies are some of the biggest, most sucessful companies in the country. The majority are in the SE and midwest. Surely you noticed many I mentioned were from TX.I Can't think of many recent companies of note in Cali.
I agree- there are smart people here. But there are also smart people in the "the other" parts of the country. Having a : everybody is smarter N gifted in Cali" is somewhat unhealthy for the state because not only is it somewhat outdated, but continues on with the perception that it casts onto the rest of the country, which is that Californians are obnoxious.I find it obnoxious also. Nobody in my family is uneducated, and most of my friends still there can easily do the same work people in this state do. They'll do it even cheaper for that matter. So the argument that California is expensive because all the smart people are drawn like flies here is kind of silly in my humble opinion.
If the cost of living standards that we now argue about on countless blogs just like this one become the new standard, then you can bet your boots that the smart people will be on their way out, leaving an older, richer, and otherwise less useful population behind. That's my 2 cents. Not to add fuel to the fire or anything. Again- just throwing my opinion into the hat.

Randy H,

Right. I know a number of the guys on State Street in Boston (CFA's and CFP's) and they were using IO's and buying high yield funds with the difference. Even if they wind up flat or neg. equity in their home they've had 5 or 7 years of dollar cost averaging and an 8%+ yield working in their favor. At that point they'll determine if they want to bring that liquidity to the closing or just hang yet another for sale sign.

The software programs out there are just incredible! They can tell you the exact day the consumer will be out of debt. The other side of the "hypo" is that with this new found disposable income folks can really "max out" all of their retirement and college funding options. I wish they had this stuff around when I was younger. But the important part is that it works almost as well for people that are even in their 50's. For folks in their 60's it means that there will be more equity in the financial legacy you leave behind.

WW2,

Good points. I should clarify by saying that CA has a built-up center of intelleectual minds and infrastructure that give it certain advantages. By no means does mean no where else does this exist. But increasingly areas of specialization are emerging. Example: Italy for design and food; TX for telecom and logistics; CA for high tech and biotech; and so on...

DiNOR,

That makes sense. The real risk of IO, is using the amount that would be toward principle as either non-discretionary expense or flat out spending it - not keeping to for buying equity at a later point

newbietobayarea,

Please remember, a lot of these guys/gals are MBA's that carry several higher designations as well on top of making 300/400K per year. Then again they are in Boston and I couldn't park my car for what I rent here in Oregon! These folks get all kinds of bonuses etc. but if you'll recall MA was one of the very first markets to show "cracks in the foundation".

I really hate to admit this (because I've been on the other side of the equation) but even if they are upside down at the time their rate lock expires it can still be a good move. The lender has taken all of the risk, you've carved out an 8% return and HAVE liquidity! Had you been paying on an amoritizing loan very little if any of the pricipal would have been paid down (if at all) and you wouldn't have ANY liquidity! What happens next? Well I'll leave that up to you.

My conclusion?Keep your old car until it’s totally trashed, which these days is around 20 years.If you do get something, Buy something used and off the radar of the car-chic.

Buying used is good... but I still want the latest safety features like pre-collision and blindspot radar.